TransUnion — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. TransUnion provides data, analytics, credit and identity-related solutions to businesses and consumers across the U.S. and international markets. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $689.3 | $603.6 | $1,970.5 | $1,704.1 |
| Operating income | $171.3 | $122.1 | $453.1 | $381.7 |
| Net income attributable to TransUnion | $91.7 | $46.3 | $264.1 | $174.4 |
| Diluted EPS | $0.48 | $0.24 | $1.38 | $0.91 |
| Adjusted EBITDA | $280.9 | $244.9 | $783.5 | $668.1 |
| Adjusted EBITDA margin | 40.7% | 39.4% | 39.6% | 38.8% |
| Cash from continuing operating activities | Not stated for quarter | Not stated for quarter | $587.7 | $410.3 |
| Capital expenditures | $44.1 | $47.9 | $132.1 | $118.3 |
Q3 revenue grew 14.2% year over year; nine-month revenue grew 15.6%. Management attributed growth to organic gains across segments, acquisitions and new products, partly offset by currency weakness. Acquisitions contributed 0.9% to Q3 revenue growth and 6.8% to nine-month growth; foreign exchange reduced growth by 0.9% and 1.2%, respectively. Callcredit, acquired in June 2018, materially affects International comparisons, particularly U.K. revenue.
Q3 operating margin was approximately 24.9%, compared with 20.2% a year earlier; nine-month operating margin was approximately 23.0%, compared with 22.4%. Revenue growth and higher operating income lifted earnings; Q3 net income also benefited from a lower effective tax rate than in Q3 2018. Adjusted EBITDA and margin are non-GAAP measures, with adjustments including acquisition-related items and the fraud incident.
Segment revenue rose in Q3: U.S. Markets 12.1% to $420.2; International 24.3% to $160.0; Consumer Interactive 7.3% to $127.8. Segment Adjusted EBITDA increased 18.3% for U.S. Markets, 11.9% for International and 10.3% for Consumer Interactive. International growth includes Callcredit and is affected by foreign exchange.
Cash, debt and liquidity
Cash and equivalents were $235.9 at September 30, 2019, versus $187.4 at December 31, 2018. Total debt was $3,739.9, down from $4,048.1; the company prepaid $265.0 of term debt during the first nine months. Long-term debt was $3,646.0, with $93.9 current. The company had no revolver borrowings and $299.9 available under its revolving credit line; it reported compliance with debt covenants. Management said available cash, operating cash flow and credit facilities should fund planned needs for the foreseeable future.
Nine-month cash from continuing operations increased to $587.7 from $410.3. Capital expenditures were $132.1, up from $118.3. Cash used in continuing investing activities was $155.1, compared with $1,927.1 in 2018, when acquisition spending was substantially higher. Cash used in financing activities was $373.0, including debt prepayments and dividends. The company paid quarterly dividends of $0.075 per share during each of the first three quarters.
Debt is primarily variable-rate; the reported weighted-average rate on variable-rate debt was 3.89% at quarter-end, compared with 4.45% at year-end 2018. Interest-rate swaps and caps hedge portions of exposure. Management expected approximately $15.0 of swap-related loss and $6.6 of cap-related loss to be reclassified to interest expense over the next twelve months.
Material changes, outlook and risks
- Fraud and controls: Fraudulent wire transfers at a Hong Kong subsidiary totaled $17.8. Including $1.8 of investigation and control-enhancement costs, the incident represented $19.7 of pretax expense, with a $16.4 after-tax loss; $9.3 was attributable to TransUnion. Management excluded the incident’s net impact from Adjusted EBITDA.
- Material weakness: Disclosure controls and procedures were deemed ineffective at period-end because controls did not prevent or timely detect unauthorized transfers. The company was enhancing email, wire-approval, online-banking and cash-management controls and expected remediation during the remainder of 2019.
- Operating environment: Management described U.S. consumer lending and demand for consumer solutions as healthy, with mortgage-market improvement, but cited uncertainty about trade policy and global growth, Brexit concerns and weakening foreign currencies. No specific numerical earnings or revenue guidance is provided in the filing text.
- Key risks: Data security and fraud, access to data sources, service continuity, regulation and litigation, macroeconomic and credit-market conditions, foreign-exchange exposure, customer retention, acquisition integration, variable-rate debt and covenant compliance. The filing also notes uncertainty around Brexit and potential impacts on the U.K. and wider markets.
- Other unusual items: Nine-month other income and expense included a $31.2 gain from an observable price change in a cost-method investment, partly offset by $8.6 of investment impairments. The company adopted lease accounting in 2019, adding reported right-of-use assets and lease liabilities.
Investor verification priorities
- Confirm remediation of the Hong Kong wire-transfer control weakness and whether additional fraud losses, legal matters or reputational effects emerge.
- Separate organic growth from Callcredit and other acquisition contributions, and assess currency-adjusted International performance.
- Review debt repayment capacity, variable-rate exposure, hedge accounting and the timing of expected hedge-related interest expense.
- Assess the composition and recurring nature of Adjusted EBITDA adjustments against GAAP earnings and operating cash flow.
- Check developments in Brexit, regulatory requirements, data-security risks, tax examinations and any material litigation disclosures.